Capella Mulls Adopted Rules for For-Profit Schools

New regulations require for-profit schools like Capella University to demonstrate that they prepare students for employment-but they have been altered from an earlier draft to allow colleges multiple chances to improve their performance before losing access to federal aid programs.

Final regulations that some predicted would deal a significant blow to for-profit schools like Minneapolis-based Capella University were released on Thursday-and changes to the original draft appear to make the rules more lenient.

The U.S. Department of Education last summer announced plans to introduce new regulations aimed at requiring colleges to better prepare students for employment after graduation, or risk losing access to federal aid loan programs.

The Obama administration said that students at for-profit institutions represent 11 percent of all higher-education learners-but they collectively receive 26 percent of all student loans and constitute 43 percent of those who default on their loans.

More than 25 percent of for-profit institutions receive at least 80 percent of their revenue from taxpayer-financed federal student aid programs.

For example, in 2010, approximately 78 percent of Minneapolis-based Capella University's revenues were derived from federal student financial aid programs.

Capella, which has touted its transparency regarding its student outcomes, wrote in an e-mailed statement on Friday that it is still reviewing the new rules. The school said that it is “very pleased” that the Education Department took into account some of its suggestions, but “we still believe that the first and most important step in measuring the return on investment for students and taxpayers begins with measuring academic quality, not just debt.”

Under the new rules, which take effect on July 1, college programs will be required to demonstrate that they lead to “gainful employment” by meeting one of the following three criteria: at least 35 percent of former students are repaying their loans; a typical graduate's annual loan payment doesn't exceed 30 percent of his or her discretionary income; or students' annual loan payment doesn't exceed 12 percent or more of their income.

Those requirements are more lenient than the earlier draft of the proposed rules-which seemed to spark concern on Wall Street, as the stock of many for-profit schools plummeted in January.

Wall Street now appears more optimistic about the future of the for-profit college industry. Capella's stock price, for example, closed up 3.3 percent at $49.58 on Thursday.

Perhaps the biggest change from the earlier draft of the rules is that colleges will have to violate the gainful employment rules three times in a four-year window before being cut off from federal loan programs. They won't lose eligibility the first time they miss the debt-ratio minimums, as was stipulated in the original draft.

The first time a school misses the mark, it will be required to tell students why it failed to meet the requirements and how it will address the issue. Upon second violation, schools must inform students that they may have unaffordable debt following graduation, that the program is at risk of losing access to federal loan programs, and what transfer options are available. If it fails a third time in four years, it loses access to the loan programs and can't reapply for at least three years.

This means that the earliest a school's programs can become ineligible is 2015. The U.S. Department of Education said that under the new rules, an estimated 18 percent of for-profit programs are expected to violate the regulations at some point, but only 5 percent will likely fail to improve and eventually lose eligibility.

“These new regulations will help ensure that students at these schools are getting what they pay for: solid preparation for a good job,” Secretary of Education Arne Duncan said in a statement. “We're giving career colleges every opportunity to reform themselves, but we're not letting them off the hook because too many vulnerable students are being hurt.”

While investors appear happy with the more lenient rules, a report by the Associated Press suggests that student advocates are frustrated by what they see as watered-down rules.

“Under the new regulations, many of the most toxic career education programs will continue to operate-largely at taxpayer expense-for three years with no requirements to improve,” Jose Cruz, a vice president of education advocacy group Education Trust, told the AP.

It's yet to be seen how the new rules will affect for-profit schools, but Capella says it's confident it can adapt appropriately.

“Ultimately, Capella's compliance-focused culture, the priority we place on learning and career outcomes, our positive working relationship with the Department of Education and our accreditors, and most importantly, the value of a Capella degree, leaves us well positioned for the future,” the company said in a statement.